CME Eyes European Expansion - Analyst Blog

By: Zacks.com

Posted: 4/10/2012 10:00:00 AM

Referenced Stocks: BCS;C;CME;GS;ICE

CME Group Inc.
(
CME
) looks to be on an acquisition spree, as just a week after
acquiring US-based GreenX Holdings, the company is now eyeing its
own futures exchange in the UK, according to Financial Times'
report yesterday.

Ever since CME Group started its trade contract clearing
services in the UK last year, alongside the company has also been
looking to expand its spread as a futures exchange operator. On
these lines, the company is bidding hard to bag the London Metal
Exchange (LME), which is also being hawked by other derivative
giants such as
NYSE Euronext Inc.
(
NYX
) and
IntercontinentalExchange Inc.
(
ICE
).

Reportedly, these derivative giants placed bids estimated to be
worth £1.0 billion ($1.57 billion) that closed in February this
year. This signified more than 15 times the last traded price
before the sale process began in September last year. Meanwhile,
LME has four chosen prospective bidders comprising CME Group, NYSE,
IntercontinentalExchange, Hong Kong Exchange and Clearing Ltd.

Founded in 1877, LME is the world's largest futures exchange,
which offers futures and options contracts on base and other
metals, which include aluminium, aluminium alloy, NASAAC (North
American Special Aluminium Alloy), cobalt, copper, lead,
molybdenum, nickel, steel billet, tin and zinc.

LME is owned by 93 members, the top most shareholders being
JP Morgan Chase & Co.
(
JPM
) and
Goldman Sachs Group Inc.
(
GS
) with 10.9% and 9.5% stakes, respectively, along with
Barclays Plc
(
BCS
) and
Citigroup Inc.
(
C
). LME is also one of the last member-owned exchanges in the world
wherein trading is conducted through the open-outcry system in the
ring by the ring dealing members. In addition to the 12 companies
who have exclusive rights to trade in the ring, around 100
companies are involved in the LME in total.

As the LME offers contracts with daily expiry dates of up to
three months from the trade date, along with longer-dated contracts
up to 123 months, it also allows for cash trading. Furthermore, it
offers hedging, worldwide reference pricing and the option of
physical delivery to settle contracts.

Meanwhile, addition of LME to CME Group's basket could enhance
its metals exchange, Comex. Hence, nailing this deal should
significantly boost the company's competitive and operating
leverage in the region. Nevertheless, CME Group is also mulling a
plan B, which could be to start-up its own futures exchange in
London so as to tap European opportunities from the financial hub
of the continent.

However, we believe that the company can shelve this plan and
concentrate on LME acquisition that is slated to announce its bid
results by May 7, 2012